Innovative Housing and Innovative Change$

In 2007 Innovative Housing decided to create a responsible alternative to traditional, high cost payday loans. Why would a housing provider get into the payday loan business? The answer is simple - our residents need access to affordable, short term cash to bridge financial gaps. IHI works closely with our residents to help them achieve financial and household stability. We have developed a very effective curriculum designed specifically for low-income people and households experiencing generational poverty, and have seen amazing results. Unfortunately, financial education and counseling are not always enough. Many low-income households truly need access to short term loans until they are able to develop new budgeting, spending and saving skills and change their relationship with money. Others, particularly in this economy, need cash to weather short term job losses, reductions in hours, or other personal hardships.

Without options, many households turn to payday and car title loans that trap them in vicious cycles of borrowing at high interest rates and on short repayment terms. IHI recognized that we need another model and that it should be available not only to our residents but also to thousands of low-income individuals and families in our region. Thanks to a capacity building grant from the US Treasury and tremendous local support from Meyer Memorial Trust and the Kaiser Permanente Community Fund at Northwest Health Foundation, we were able to turn our idea into reality.

Innovative Housing launched Innovative Change$ (IC$) in December 2009. IC$ obtained its lending license and began making loans in February, 2010. In April, 2011, the U.S. Treasury certified IC$ as a Certified Development Financial Institution ("CDFI"). IC$ offers two loan products - an Opportunity Loan and a Credit Builder Loan - and pairs them with comprehensive financial education. It uses access to financial services as an opportunity to educate and inform consumers and provides tailored one-on-one coaching as well as group workshops. IC$ is not open to the public - it works with community-based partners who refer borrowers for education and loans. To learn more about Innovative Change$ and its services, please visit www.innovativechanges.org.

History and Background
Innovative Housing prides itself on our comprehensive and individualized resident services programming. We have years of experience providing holistic services to residents of more than 400 affordable housing units throughout the Portland metropolitan region that house a range of formerly homeless singles and families, people with physical and mental disabilities, very low-income families, and low wage earners. This relationship with our residents has given us a very good understanding of their financial struggles and helped us develop materials and methods of assisting them in their particular financial situations. We have been concerned about the use of payday loans by our residents for several years and have worked to mitigate the negative impact of compounding debt on their lives.

At the same time, we recognize that for many low-income households with poor credit and little access to capital, a payday loan is sometimes the best option available. Consider Joanna, a domestic violence survivor and dedicated mother of two toddlers who struggles under the burden of heavy garnishments of her paychecks. She took out a payday loan to cover a child-care bill that she hadn't paid in three months. When informed of the high-cost of the loan, she asked, "What am I supposed to do? It's more expensive to lose my job, my house and my kids." The unfortunate reality is that payday loans are often a rational economic decision for many households. IHI is committed to providing a socially responsible alternative and helping people like Joanna break their dependency on high-cost, short-term loans.

Why is Financial Education and Access to Cash So Important?
Money management skills and credit scores are becoming more complicated and increasingly affect all aspects of our lives, yet financial education and services for low-income, high debt households in the Portland Metro area are still not widely available at levels necessary to be effective. In 2005 IHI went through its rent rolls and identified households with incomes high enough to transition into homeownership. After talking to a number of families, we quickly realized that low incomes were not the only factor keeping them in affordable housing. Even as household incomes increase, families find themselves trapped by their lack of money management skills, high debt-loads, wage garnishments, and poor credit and banking histories.

IHI residents are representative of many low-income Oregonians. According to the Oregon Department of Housing and Community Service's most recent report on poverty, one of the top four needs of low-income residents in Multnomah County is access to temporary financial aid for unexpected expenses. In Portland there are no agencies or organizations that offer emergency cash assistance to the general public, and available rental and utility assistance are insufficient to meet the community need. Although there are numerous financial institutions and several CDFIs serving the area, they are not organized to effectively serve households with high debt loads and poor credit and banking histories. As a result, low-income households are utilizing high-interest, predatory loans to get by from paycheck to paycheck. In fact, there has been a steady increase in short-term loans every year since 2001, when the Oregon Department of Consumer and Business Services (DCBS) began to collect data on payday usage. In 2006 (the most recent year for which DCBS has statistics), the State's payday lenders made 937,361 loans, an increase of 78% from the 527,299 loans made in 2001.

Legislative Action
In June 2007, the Oregon legislature passed four bills (House Bill 2871, 2202, 2203, 2204) that regulated the exorbitant fees and interest rates commonly associated with these types of financial services. Oregon has made notable strides toward eliminating predatory practices by setting a statewide cap of 36% interest, a $10 per $100 (up to a maximum of $30) origination fee and a free two roll-over limit (if a borrower cannot repay the debt when due, he or she may extend or "roll-over" the loan. In the past payday lenders charged a fee for each rollover, often costing the consumer more in fees than the loan principal itself). Prior to this legislation, payday loan companies in the state were charging as much as 541% annual interest on these loans. The Legislature also capped check cashing fees at the greater of $5 or 2% for government-issued checks, 3% for paychecks and 10% for personal checks.

When changes to the Oregon Consumer Finance Act went into effect, advocates lauded them as a resounding success. Opponents claimed that the caps would result in a 70% decrease in revenue for non-bank financial service providers, causing many to close shop and leaving a vacuum in the market. While the reform provided much needed protection for consumers and reduced the number of payday lenders in Portland from 147 to only 15, it did not address the need for financial products and services by marginalized consumers without access to other forms of credit. Too few people asked why an industry serving a disproportionate number of low-income people was a booming success and what could be done to address such an apparent need in an ethical and sustainable way.

Why Do Consumers Choose Alternative Financial Services?
We have identified two primary reasons:
  1. Lack of Adequate Financial Competency

    Some consumers utilize high-cost options because they are not aware that they have access to alternatives or they perceive those alternatives to be more difficult to manage than familiar alternative services. Providers of non-bank financial services locate and aggressively advertise in impoverished neighborhoods that traditional financial institutions have abandoned. Other consumers are more comfortable accessing financial services that have simplified usage procedures and transparent fee structures. They may have difficulty understanding the fine print that often spells out the fees and penalties associated with bank accounts and credit cards. The consequences for making mistakes in the use of traditional financial products can be equally, if not more, expensive than the cost of payday loan and check-cashing services. Many are unprepared for those expenses and unaware of the best ways to mitigate personal damages. Addressing the issue directly on its website, Community Financial Services Association (CFSA), the payday loan industry's national trade association, states that non-bank financial services are often a "less costly" and "more desirable" option for consumers who would otherwise bounce checks, pay overdraft fees or incur late payment penalties.

    In late 2006 a Reed College Economics major, Izarra Varela, surveyed over 200 individuals using payday and check cashing services at three different stores in the Portland area. Ms. Varela found that 90% of respondents felt it was easy to borrow from a payday lender and just over half felt more comfortable there than at a traditional bank. Forty-three percent of those who visited a particular store had been there before and 69% anticipated returning to that store in the future.

  2. Exclusion from Traditional Banking and Credit Services


    Consumers who have poor credit histories or who have mismanaged bank accounts in the past are often precluded from the formal banking system altogether. If a consumer is unable to pay an overdraft or other transaction fee or experiences multiple overdrafts, a bank or credit union may report that incident to ChexSystems regardless of the amount. ChexSystems is a monitoring system used by financial institutions to mitigate risk and most will not open an account for someone with a reported ChexSystems incident - which can remain there for up to five years. For example, one of IHI's residents was recently unable to open an individual development account due to a $6 incident reported on ChexSystems, without her knowledge, in 2004.

    When these consumers need to cash a check or need emergency or short-term loan products they have few options other than turning to alternative financial services. Although Ms. Varela's survey was conducted before the 2007 changes to the Oregon Consumer Finance Act went into effect, the results reflect the reality that most low- and moderate-income families continue to face on a daily basis, and mirror what IHI has witnessed among our residents. Forty-two percent of the survey participants had no savings account and 62.1% of those obtaining payday loans did so to cover their rent and utilities. The second most common reason given for utilizing payday loans was to cover car-related expenses, at 16.2%.


What Does Innovative Change$ Provide?


    Small-dollar, short-term consumer loans.The first step in helping people transition out of poverty is to provide practical, comprehensive financial education. The second step is to provide the tangible resources necessary to help them overcome their barriers to financial stability. IC$ offers two loan products designed to increase customers' financial resiliency:


    • Opportunity Loans: installment loans ranging from $100 to $1000 amortized over six to twelve months designed to help customers sustainably transition into a position of greater financial control and longer-term stability.

    • Credit Builder Loans: $150 installment loans amortized over twelve months designed for those who wish to build, repair or improve existing credit scores in order to increase their long-term ability to create and sustain wealth.